WAKE FOREST BANCSHARES, INC.

		June 30,				September 30,
		2008				2007
		(Unaudited)				*
ASSETS
Cash and short-term cash investments		$	11,227,500			$	21,670,500
Bank certificates of deposit			13,357,000				4,158,000
Investment securities:
Available for sale, at estimated market value			1,663,750				1,999,900
FHLB stock			195,200				191,400
Loans receivable, net of loan loss allowances of $1,194,750 at June 30, 2008 and $1,187,550 at September 30, 2007			78,946,450				76,172,100
Accrued interest receivable			178,100				265,350
Foreclosed assets, net			483,250				1,003,800
Property and equipment, net			368,150				357,350
Bank owned life insurance			1,174,600				1,141,350
Deferred income taxes, net			525,250				390,650
Prepaid expenses and other assets			177,200				47,300
Total Assets		$	108,296,450			$	107,397,700
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits		$	86,389,950			$	85,659,150
Accrued interest on deposits			74,650				64,750
Accrued expenses and other liabilities			761,500				924,950
Dividends payable			104,550				99,750
Redeemable common stock held by the ESOP net of unearned ESOP shares			390,950				465,550
Total Liabilities			87,721,600				87,214,150
Stockholders’ equity:
Preferred stock, authorized 1,000,000 shares, none issued			—				—
Common stock, par value $ .01, authorized 5,000,000 shares, issued 1,253,948 shares at June 30, 2008 and at September 30, 2007			12,550				12,550
Additional paid-in capital			5,779,500				5,779,500
Accumulated other comprehensive income			96,550				305,000
Retained earnings, substantially restricted			16,199,800				15,555,950
Less: Common stock in treasury, at cost (93,955 shares at September 30, 2007 and 96,320 shares at June 30, 2008)			(1,513,550	)			(1,469,450	)
Total stockholders’ equity			20,574,850				20,183,550
Total liabilities and stockholders’ equity		$	108,296,450			$	107,397,700

See Notes to Consolidated Financial Statements.

WAKE FOREST BANCSHARES, INC.

		2008				2007
Interest and dividend income:
Loans		$	1,297,850			$	1,632,900
Investment securities			24,250				14,200
Short-term cash investments			192,550				332,050
Total interest income			1,514,650				1,979,150
Interest expense:
Interest on deposits			799,800				937,550
Total interest expense			799,800				937,550
Net interest income before provision for loan losses			714,850				1,041,600
Provision for loan losses			(35,000	)			(37,500	)
Net interest income after provision for loan losses			679,850				1,004,100
Noninterest income:
Service charges and fees			19,500				19,000
Other			14,950				9,950
			34,450				28,950
Noninterest expense:
Compensation and benefits			201,800				224,150
Occupancy			11,150				10,800
Federal insurance and operating assessments			12,300				12,000
Data processing			33,000				27,500
REO provisions and expense			2,700				28,400
Other operating expense			78,650				70,700
			339,600				373,550
Income before income taxes			374,700				659,500
Income taxes			139,500				234,950
Net income		$	235,200			$	424,550
Basic earnings per share		$	0.20			$	0.37
Diluted earnings per share		$	0.20			$	0.37
Dividends per share		$	0.20			$	0.19

See Notes to Consolidated Financial Statements.

WAKE FOREST BANCSHARES, INC.

		2008				2007
Interest and dividend income:
Loans		$	4,205,550			$	4,849,300
Investment securities			73,350				28,200
Short-term cash investments			727,050				1,000,550
Total interest income			5,005,950				5,878,050
Interest expense:
Interest on deposits			2,622,800				2,739,300
Total interest expense			2,622,800				2,739,300
Net interest income before provision for loan losses			2,383,150				3,138,750
Provision for loan losses			(105,000	)			(130,000	)
Net interest income after provision for loan losses			2,278,150				3,008,750
Noninterest income:
Service charges and fees			55,950				49,700
Other			37,900				37,450
			93,850				87,150
Noninterest expense:
Compensation and benefits			581,300				649,200
Occupancy			37,600				35,600
Federal insurance and operating assessments			36,650				35,400
Data processing			89,100				85,350
REO provisions and expense			11,650				68,600
Other operating expense			233,000				262,450
			989,300				1,136,600
Income before income taxes			1,382,700				1,959,300
Income taxes			499,200				691,650
Net income		$	883,500			$	1,267,650
Basic earnings per share		$	0.76			$	1.09
Diluted earnings per share		$	0.76			$	1.09
Dividends per share		$	0.60			$	0.57

See Notes to Consolidated Financial Statements.

WAKE FOREST BANCSHARES, INC.

		2008				2007
For the Three Months Ended June 30:
Net income		$	235,200			$	424,550
Other comprehensive (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period			(61,650	)			800
Less: reclassification adjustments for (losses) included in net income			—				—
Other comprehensive income (loss)			(61,650	)			800
Comprehensive income		$	173,550			$	425,350

		2008				2007
For the Nine Months Ended June 30:
Net income		$	883,500			$	1,267,650
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period			(208,450	)			(33,800	)
Less: reclassification adjustments for gains (losses) included in net income			—				—
Other comprehensive income (loss)			(208,450	)			(33,800	)
Comprehensive income		$	675,050			$	1,233,850

See Notes to Consolidated Financial Statements.

WAKE FOREST BANCSHARES, INC.

		2008				2007
Net income		$	883,500				1,267,650
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			35,850				40,200
Provision for loan losses			105,000				130,000
Deferred income taxes			(6,900	)			(60,350	)
Loss (Gain) on sale of foreclosed assets			(2,900	)			3,150
Increase in cash surrender value of life insurance			(33,250	)			(29,750	)
Changes in assets and liabilities:
Prepaid expenses and other assets			(129,900	)			2,500
Accrued interest receivable			87,250				32,100
Accrued interest on deposits			9,900				(22,100	)
Accrued expenses and other liabilities			(163,450	)			112,300
Net cash provided by operating activities			785,100				1,475,700
Cash Flows From Investing Activities:
Net (increase) decrease in loans receivable			(3,682,050	)			493,650
Net increase in bank certificates of deposit			(9,199,000	)			(99,000	)
Purchase of US agency securities			—				(1,500,000	)
Proceeds from the sale of foreclosed assets			1,354,500				262,500
Redemption of FHLB stock			—				6,200
Capital addtions to foreclosed assets			(28,350	)			(1,650	)
Purchase of FHLB stock			(3,800	)			—
Purchase of property and equipment			(46,650	)			—
Net cash used in investing activities			(11,605,350	)			(838,300	)
Cash Flows From Financing Activities:
Net increase in deposits			730,800				2,220,300
Proceeds from exercise of stock options			—				86,900
Additions to paid-in-capital from tax effect from exercise of of stock options			—				27,000
Repurchase of common stock for the Treasury			(44,100	)			(77,550	)
Dividends paid			(309,450	)			(288,250	)
Net cash provided by financing activities			377,250				1,968,400
Net increase in cash and cash equivalents			(10,443,000	)			2,605,800
Cash and cash equivalents:
Beginning			21,670,500				22,828,900
Ending		$	11,227,500				25,434,700
Supplemental Disclosure of Cash Flow Information:
Cash payments of interest		$	2,612,900				2,761,400
Cash payment of income taxes		$	576,000				714,000
Supplemental Disclosure of Noncash transactions:
Increase (decrease) in ESOP put option charged to retained earnings		$	(74,600	)		$	(73,450	)
Transfer of loans to foreclosed assets		$	802,700				295,850
Increase (decrease) in unrealized gain on investment securities, net of tax		$	(208,450	)			(33,800	)

See Notes to Consolidated Finanical Statements.

Wake Forest Bancshares, Inc.

Note 1. Nature of Business

Wake Forest Bancshares, Inc. (the “Company”) is located in Wake Forest, North Carolina and is the parent stock holding company of Wake Forest Federal Savings and Loan Association (the “Association” or “Wake Forest Federal”), its only subsidiary. The Company conducts no business other than holding all of the stock in the Association, investing dividends received from the Association, repurchasing its common stock from time to time, and distributing dividends on its common stock to its shareholders. The Association’s principal activities consist of obtaining deposits and providing mortgage credit to customers in its primary market area, the counties of Wake and Franklin, North Carolina. The Company’s and the Association’s primary regulator is the Office of Thrift Supervision (OTS) and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC).

Note 2. Organizational Structure

The Company is majority owned by the Wake Forest Bancorp, M.H.C., (the “MHC”) a mutual holding company. Members of the MHC consist of depositors and certain borrowers of the Association, who have the sole authority to elect the board of directors of the MHC for as long as it remains in mutual form. Initially, the MHC’s principal assets consisted of 635,000 shares of the Association’s common stock (now converted to the Company’s common stock) and $100,000 in cash received from the Association as initial capital. Prior to 2003 (see Note 4), the MHC received its proportional share of dividends declared and paid by the Association (now the Company), and such funds are invested in deposits with the Association. The MHC, which by law must own in excess of 50% of the stock of the Company, currently has an ownership interest of 54.9% of the Company. The mutual holding company is registered as a savings and loan holding company and is subject to regulation, examination, and supervision by the OTS.

The Company was formed on May 7, 1999 solely for the purpose of becoming a savings and loan holding company and had no prior operating history. The formation of the Company had no impact on the operations of the Association or the MHC. The Association continues to operate at the same location and is subject to all the rights, obligations and liabilities of the Association which existed immediately prior to the formation of the Company. The Board of Directors of the Association capitalized the Company with $100,000. Future capitalization of the Company will depend upon dividends declared by the Association based on future earnings, or the raising of additional capital by the Company through a future issuance of securities, debt or by other means. The Board of Directors of the Company has no present plans or intentions with respect to any future issuance of securities or debt at this time.

Note 3. Basis of Presentation

The accompanying unaudited consolidated financial statements (except for the consolidated statement of financial condition at September 30, 2007, which is derived from audited consolidated financial statements) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-B. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (none of which were other than normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. The results of operations for the three and nine month periods ended June 30, 2008 are not necessarily indicative of the results of operations that may be expected for the Company’s fiscal year ending September 30, 2008. The accounting policies followed are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company’s September 30, 2007 Annual Report to Stockholders.

Note 4. Dividends Declared

On June 16, 2008, the Board of Directors of the Company declared a dividend of $0.20 a share for stockholders of record as of June 30, 2008 and payable on July 10, 2008. The dividends declared were accrued and reported as dividends payable in the June 30, 2008 Consolidated Statement of Financial Condition. Wake Forest Bancorp, Inc., the mutual holding company, waived the receipt of the dividend declared by the Company this quarter.

Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 5. Earnings Per Share

Basic earnings per share amounts are based on the weighted average shares of common stock outstanding. Diluted earnings per share assumes the conversion, exercise or issuance of all potential common stock instruments such as options, warrants and convertible securities, unless the effect is to reduce a loss or increase earnings per share. This presentation has been adopted for all periods presented. There were no adjustments required to net income for any period in the computation of diluted earnings per share. The reconciliation of weighted average shares outstanding for the computation of basic and diluted earnings per share for the three and nine month periods ended June 30, 2008 and 2007 is presented below.

For the Three Months Ended June 30:		2008				2007
Weighted average shares outstanding for Basic EPS			1,158,024				1,161,088
Plus incremental shares from assumed issuances of shares pursuant to stock option and stock award plans			—				—
Weighted average shares outstanding for diluted EPS			1,158,024				1,161,088
For the Nine Months Ended June 30:			2008				2007
Weighted average shares outstanding for Basic EPS			1,159,133				1,160,165
Plus incremental shares from assumed issuances of shares pursuant to stock option and stock award plans			—				1,145
Weighted average shares outstanding for diluted EPS			1,159,133				1,161,310

Note 6. New Accounting Standard

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold and measurement approach for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition issues.

FIN No. 48 establishes a two-step process for evaluation of tax positions. The first step is recognition, under which the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The enterprise is required to presume the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement, under which a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The cumulative effect of adopting FIN No. 48 is required to be reported as an adjustment to the opening balance of retained earnings (or other appropriate components of equity) for that fiscal year. FIN No. 48 is effective for the Company’s current fiscal year and its adoption had no impact on Company’s consolidated financial statements.

Wake Forest Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 7. Future Reporting Requirements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements, which enhances existing guidance for measuring assets and liabilities using fair value. SFAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosures about the use of fair value to measure assets and liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement and establishes a fair value hierarchy with the highest priority being quoted market prices in active markets. While SFAS No. 157 does not add any new fair value measurements, it may change certain current practices. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 will have a material impact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides an option to measure eligible financial instruments at fair value at specified election dates. Unrealized gains and losses on specific financial assets and liabilities that are designated to be carried at fair value will be recognized in earnings thereafter. The fair value option may be applied instrument by instrument, is irrevocable and may only be applied to entire instruments, not to portions of instruments. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company does not currently plan to adopt SFAS No. 159.

The Emerging Issues Task Force (EITF) reached a consensus at its September 2006 meeting regarding EITF 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. The Company has policies that fall within the scope of EITF 06-4. EITF 06-4 is effective for fiscal years beginning after December 15, 2007 and can be applied by either a change in accounting principle through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption or a change in accounting principle through a retrospective application to all prior periods. The Company is currently evaluating the impact of EITF 06-4 on its consolidated financial statements.

Wake Forest Bancshares, Inc.

Forward Looking Statements

Information set forth below contains various forward-looking statements within the meaning of Section 27A of the Securities and Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements represent the Company’s judgment concerning the future and are subject to risks and uncertainties that could cause the Company’s actual operating results to differ materially. Such forward-looking statements can be identified by the use of forward-looking terminology, such as “may”, “will”, “expect”, “anticipate”, “estimate”, “believe”, or “continue”, or the negative thereof or other variations thereof or comparable terminology. The Company cautions that such forward-looking statements are further qualified by important factors that could cause the Company’s actual operating results to differ materially from those in the forward-looking statements, as well as the factors set forth in the Company’s periodic reports and other filings with the SEC.

Comparison of Financial Condition at September 30, 2007 and June 30, 2008

Total assets increased by $898,750 to $108.3 million at June 30, 2008 from $107.4 million at September 30, 2007. The increase in total assets during the nine month period ended June 30, 2008 was funded primarily from an increase in deposits of $730,800 and cash generated from internal operating activities during the same period. Due to adequate levels of current liquidity, deposits were priced to meet competition and retain certain accounts but not to aggressively attract additional funds. The Company attempts to maintain a certain level of liquidity to fund loan growth and to provide a cushion for its construction loan commitments. During the nine months ended June 30, 2008, cash and short term cash investments decreased by approximately $1.2 million.

Net loans receivable increased by approximately $2.7 million to $78.9 million at June 30, 2008 from $76.2 million at September 30, 2007. The increase during the current nine month period occurred primarily due to a $2.0 million increase in the Company’s commercial real estate portfolio but substantially all loan categories experienced some level of growth with the exception of the Company’s land loan portfolio which declined by approximately $647,000 during the period. The increase in the Company’s commercial real estate portfolio occurred because of two large loan originations that closed during March 2008 and which were secured by a couple of industrial warehouses located in the area. The residential market in the Company’s primary lending area remains sluggish when compared to the same periods a year earlier and both re-sales and newly constructed homes remain on the market for longer periods of time. New home starts are considerably less during the current nine month period when compared to the same time period a year ago. The Company’s local real estate market experienced significant growth over the last five years, primarily due to an influx of newcomers from outside the area. Although the Company’s markets have not experienced a drop in home prices like many areas of the country, local real estate markets are impacted by newcomers unable to purchase homes here until they are able to sell residences elsewhere.

In addition, questions about the strength of the economy combined with tighter credit standards associated with the sub-prime fall-out have slowed the residential real estate markets significantly both locally and nationwide. Population growth and employment expansion across a wide spectrum of the local economic base combined with moderate interest rate levels will ultimately determine whether loan demand can be revived. Assuming local economic conditions improve, management believes that the long-term fundamentals of its lending markets provide potential for future loan growth. However, there can be no assurances that such loan demand can or will materialize in the near future.

Investment securities decreased by $332,350 to $1,858,950 at June 30, 2008 from $2,191,300 at September 30, 2007. The decrease is attributable to a $347,450 unrealized loss in the Company’s investment in FHLMC stock offset by $11,300 increase in unrealized appreciation in the Company’s bond portfolio during the past nine months and a required $3,800 purchase of FHLB stock during the same period. The Company has held its FHLMC investment for many years and considers it to be a long term investment. The Company has very little cost basis in the stock and retains an approximately $125,750 unrealized gain in the stock at June 30, 2008. The FHLMC stock has declined during the last nine months due to the issues surrounding sub-prime lending and the market for mortgage-backed securities. The Company also has an investment of $1.5 million in FHLB bonds.

Wake Forest Bancshares, Inc.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations

Comparison of Financial Condition at September 30, 2007 and June 30, 2008 (Continued)

The Company generally maintains higher levels of short term liquidity in order to minimize interest rate risk, to fund construction loan commitments, and due to the relatively minor differential in current investment rates available on extended maturities. As a result, the Company has not been actively involved in the buying and selling securities but has been purchasing FDIC insured bank certificates of deposit generally with maturities up to one year to protect against downward interest rate risk. The Company’s portfolio of bank certificates of deposit amounted to $13.4 million at June 30, 2008. These bank certificates of deposit investments are typically acquired at interest rates of 1.00% to 1.50% higher than most debt securities currently available for terms much longer than a year.

The Company had no borrowings outstanding during the period because its current level of liquidity was sufficient to fund lending and other cash commitments. The Company has recorded a liability of $390,950 at June 30, 2008 for the ESOP put option which represents the potential liability owed to participants based on the current market value of the Company’s stock if all participants were to request the balance of their account from the Company in cash instead of stock.

The Company has an ongoing stock repurchase program authorizing management to repurchase shares of its outstanding common stock. The repurchases are made through registered broker-dealers from shareholders in open market purchases at the discretion of management. The Company intends to hold the shares repurchased as treasury shares, and may utilize such shares to fund stock benefit plans or for any other general corporate purposes permitted by applicable law. At June 30, 2008 the Company had repurchased 96,320 shares of its common stock. The program continues until completed or terminated by the Board of Directors.

Retained earnings increased by $643,850 to $16.2 million at June 30, 2008 from $15.5 million at September 30, 2007. The increase is primarily attributable to the Company’s earnings of $883,500 during the nine month period ended June 30, 2008, reduced by $314,250 in dividends declared during the period and a $74,600 recovery of prior charges to retained earnings to reflect the change in the fair value of the ESOP shares subject to the put option. At June 30, 2008 the Company’s capital amounted to $20.6 million, which as a percentage of total assets was 19.00%. The Company and the Association are both required to meet certain capital requirements as established by the OTS. At June 30, 2008, all capital requirements were met.

Asset Quality

The Company’s level of non-performing loans, consisting of loans past due 90 days or more, amounted to $616,300 or 0.77% as a percentage of loans outstanding at June 30, 2008. Non-performing loans amounted to $595,650 or 0.77% as a percentage of loans outstanding at September 30, 2007. At June 30, 2008, non-performing loans consisted of one uncompleted spec residential construction loan amounting to $294,950, one single family loan totaling $133,600, and one home equity loan amounting to $187,750. The residential single family loan and the home equity loan are to the same borrower and secured by the same property. Foreclosure proceedings have commenced on all of the non-performing loans outstanding at June 30, 2008. Only the residential construction loan’s cost basis is considered to be in excess of its fair market value and the Company has allocated sufficient loss reserves to cover the deficiency at June 30, 2008. All of the loans have been placed on non-accrual status.

Non-performing assets also includes real estate acquired through foreclosure. At June 30, 2008, foreclosed real estate included one residential building lot ($26,500) and three former residential construction loans on partially completed single family properties ($456,750). The three partially completed single family homes were transferred to foreclosed assets after having incurred a combined $86,800 in loan charge-offs and the Company believes that no further write downs are necessarily in order to dispose of the properties. One of the single family properties is currently under contract and is scheduled to be sold in July 2008. The foreclosed highway 98 commercial tract ($1,003,800) that the Company had held for several years was sold during the current quarter at approximately its cost basis.